Everyone is going gaga over the in-principle cabinet decision to separate tax policy from tax administration at the Federal Board of Revenue (FBR), a decision that has been pending for more than a decade even though it has existed on paper for all this time. What exactly does it entail and what are the nuances that the federal government needs to think about has not been discussed. This piece attempts to fill that gap.
Globally there are three broad types of institutional arrangements of tax departments in terms of their relationship with the ministry of finance. Historically, the business of collecting taxes rested with a directorate within the ministry of finance. However, some countries gradually moved away to create a semi-autonomous body affiliated with the ministry of finance, to be able to achieve freedom from political interference in day-to-day operations, implement their human resources policies and organisational reforms including investments in information technology.
The latest wisdom, although it’s been a while since that wisdom dawned on nations, is to create a completely autonomous entity that is separate from the ministry of finance. In many such cases, there is an oversight board, which includes external directors.
In its comparative assessment of tax administration across Asia, the ADB notes that “although the board’s chair tends to be a Ministry of Finance official, a clear separation between the oversight function and the executive function creates an environment where the executive section of a tax administration can focus on daily tax collection operations with minimum political intervention”. Private sector representation at the board is aimed to give a holistic direction to the tax collecting agency and protect taxpayers’ rights.
The board, however, also ought to have a member from the tax administration agency or otherwise develop a close coordination mechanism, because if tax policy and administration are not in sync, the reforms will generally not work. Clearly, there is no use putting out policy that cannot be administrated or make a complex policy that creates incentives to cheat, and so forth.
The existing state of the FBR is hotchpotch. It is a body separate from the ministry of finance. But in practice it is not free from political intervention. Nor has it achieved any marvels in IT, human resources management or organisational milestones that a semi-autonomous body is intended to achieve. In fact, not a lot of people know this but the FBR Act 2007 envisions it to be an autonomous body. Here is what the preamble states:
“whereas the Federal Board of Revenue must pursue its objective and vision to be a modern, progressive, effective, autonomous and credible organisation by providing quality services and promoting compliance with tax related laws, while being mindful of upholding values such as integrity, professionalism, teamwork, courtesy, fairness, transparency and responsiveness.”
That successive governments since the act was made in 2007 simply ignored this law is a classic example of governance failure in Pakistan’s Lost Decade-II (sequel to the lost decade of the 90s). Now that the PTI-led government has given an indication to fix it, they are best advised not to wing it.
The first thing the government has to decide is whether the FBR’s policy board will be within the FBR or a supra-body over and above the administration. From the looks of the proposed composition of the board under section 6 of FBR Act 2007, it ought to be a supra-body to which the administration reports to.
There is lack of clarity over the reporting lines of the policy board under the reformed set up: whether it will report to the revenue division in the finance ministry or the cabinet. Considering that finance minister is designated to be the chair of the board, and the representation of the parliament at the board, good governance suggests that the board should report directly to the cabinet, in which case the revenue division may need to be done away with.
The government also ought to dwell on the third part of the preamble of FBR Act that states: “whereas it is expedient to regulate the matters relating to the fiscal and economic policies; administration, management; imposition, levy and collection of taxes and duties”. For proper separation of the policy and administration, the law needs to clearly specify that ‘regulation of matters relating to economic and tax policies’ is the job of the policy board and not the FBR’s administrative arm.
The revised composition of the Policy Board that came about after amendments to FBR Act in 2011 is much better than its predecessor called ‘Cabinet Committee for Federal Revenue’ in the original 2007 Act. However, in order to make it an effective body, the government needs to make a few changes to the law.
First, as per current law [under section 6(2)(k)] the prime minister is to nominate private sectors members as sectoral experts or economists on ‘honorary basis’. These should instead be formal appointments on the simple premise that governance shouldn’t be left to volunteers. These appointments should have their unique and specific terms of reference and formal appointments instead of volunteers working as honorary members.
Second, under the existing on-paper mechanism, the board does not have a full-time secretariat. The government needs to amend the act and allow for the setting up of a full-fledged secretariat, led and staffed by economists and tax experts.
It is good that the current composition of policy board already has a host of parliamentarians, some of whom may even be from the opposition bench. But clearly, one cannot expect the parliamentarians to be able to critically analyse policy options. The presence of parliamentarians is important for check and balance, and they should remain so on the board, but they have to be provided a support through a permanent secretariat.
Third, there is no reason why the minister of privatisation should be a member of the policy board, especially under a government that does not believe in privatisation per se. Besides privatisation is ideally a limited time frame exercise; conceptually, the office of the minister of privatisation should come to an end when all public sector enterprises are privatised, which shouldn’t take more than 5-10 years. The tax policy board on paper has much longer shelf life, if not a permanent shelf life. Instead of the minister of privatisation, therefore, the government should appoint the head of federal board of investment as a member of the policy board, while putting in place mechanism that ensures the federal BOI also represents the demands and interests of the provincial BOIs.
Fourth, existing policy board does not have provincial representation. At a time when businesses are suffering from lack of coordination between federal and provincial tax bodies, and when the responsibility of a host of economic sectors rests with the provinces, it is important to have the four provincial secretaries on FBR’s policy board. The moral of the story: don’t go gaga over the separation of policy and administration just yet, for much depends on the nature and scope of amendments and ancillary TORs. Reportedly, PM Imran Khan is very unhappy with FBR’s performance, and sources say that he has given them until March 2019 to put their house in order or the organisation will be disbanded, and new entity set up in its place. Can PM Khan really do so, and what other areas of reforms that FBR needs? Stay tuned!
Acknowledgement: This piece is based on a host of academic journals and policy reports as well as conversations with several tax experts including Dr Ikram ul-Haq and Masour Naqvi (others preferred to remain anonymous).